So What Exactly Is a Bitcoin Anyway? Complete Breakdown of Bitcoin

There’s virtual money, and then there’s Bitcoin. The super geeky Bitcoin is a mathematically-derived currency that promises to change the way people use money. Bitcoins are not real coins-they’re strings of code locked with military-grade encryption-and people who use them to buy and sell goods and services are difficult to trace. Along with anonymous drug dealers, Ashton Kutcher and the Winklevoss twins have reportedly jumped on the bandwagon. There’s something to be said about using currency that isn’t regulated by the government or banks, doesn’t come with the usual transaction fees and is impossible to counterfeit. Bitcoin also promises to be disaster-proof, because you can’t destroy numbers in the same way that you can destroy gold reserves or paper money.

What is Bitcoin?

Bitcoin is a digital currency created in 2009 by a developer hiding under the pseudonym of Satoshi Nakamoto (supposedly a Japanese guy who has perfect command of American English). Bitcoin is decentralized, meaning it is not controlled by a central authority like a financial institution, country, government or individual. It is peer-to-peer and open-source, distributed across the internet from computer to computer, without need for middlemen. Compared to U.S. dollars, Bitcoin is virtually untraceable, making it attractive to libertarians afraid of government meddling and denizens of the underworld. You can use it to pay for purchases online and off, from illegal drugs on the Silk Road to legit restaurant meals.

Where to Get Bitcoins

You can get Bitcoins from friends, online giveaways or by buying them with real money from Bitcoin exchanges. Using real money to buy Bitcoins defeats the whole purpose of anonymity, however, because you may need to add your bank account to a third party site. You can also buy Bitcoins using your mobile phone or through cash deposit establishments. New Bitcoins are created by “mining.” Mining is done automatically by computers or servers-it’s not real-world mining where you have to dig underground to unearth commodities, but the concept is similar. You have to exert effort to dig up gold, and you (or your machine) also have to spend time and resources to verify and record Bitcoin transactions.

One of the coolest things about Bitcoin is that it gets its value not from real-world items, but from codes. Bitcoins are pulled out of the ether by machines (and the people who run them) in exchange for solving complex mathematical problems related to the current number of Bitcoins. These bulky and pricey supercomputers come with powerful encryption capabilities (and reportedly suck electricity like nobody’s business). In a typical transaction, buyer A from location X pays seller B some Bitcoins online. Miners then race to authenticate and encrypt the transaction, logging Bitcoin codes in a central server. Whomever solves the puzzle first gets the Bitcoins. About 25 new Bitcoins are created for every 10-minute block, but that number can increase or decrease depending on how long the network runs.

How to Use Bitcoins

Once you get your hands on some Bitcoins, you need to store them in an online wallet through a computer program or a third-party website. You become part of the Bitcoin network once you create your virtual wallet. To send Bitcoins to another user or pay for online purchases, get that person/seller’s identification number and transfer Bitcoins online. Processing takes about a few minutes to an hour, as Bitcoin miners across the globe verify the transaction.

How to Make Money on Bitcoins

If you’re still skeptical, one Bitcoin is currently worth about $90 (as of 18 April 2013), with hourly fluctuations that can make a day trader dizzy. Volatile as it is, more and more people are starting to milk the phenomenon for all it is worth-while it lasts. How to get your slice of the virtual gold rush? Some ways: Sell Bitcoin mining computers, sell your Bitcoins at crazy prices on eBay and speculate on Bitcoin markets. You can also start mining. Any person can mine Bitcoins, but unless you can afford an efficient setup, it will take an ordinary PC a year or more to solve algorithms. Most people join pools of other miners who combine their computing power for faster code-cracking.

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